CRE 101 · deweyluong.realtor

Vacancy Rate Explained: Why the Rent on Paper Is Never the Rent a Georgia Property Collects

Every income property has two rents: the rent on paper and the rent it actually collects. The gap between them is vacancy — and on the made-up Gwinnett center on this page it is not small. Gross potential rent is $440,000, but 10% physical vacancy, 1% credit loss and one free-rent concession take $59,400 off the top, an economic vacancy of 13.5%, before a single expense is paid. A seller who prices the building as if the paper rent were real overstates NOI by $48,400 — and at a 6.5% cap rate that one assumption inflates the value by $744,615. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

The worked example uses made-up, rounded numbers to teach the mechanics. This page is general education, not financial or legal advice.

Three vacancies, three different numbers

• Physical vacancy: the share of space sitting empty, measured in square feet or in rent. If 2,000 of 20,000 square feet are dark, physical vacancy is 10% — whether or not the brochure mentions it. This is the number most people mean when they say “vacancy rate.”
• Credit loss: space that is leased but not paying — a tenant behind on rent, in default, or in bankruptcy. The space looks occupied on a drive-by and collects nothing. Underwriters carry it as a small percentage of gross potential rent, commonly around 1%, because some rent on every rent roll never arrives.
• Economic vacancy: the full gap between gross potential rent and what the property actually collects: physical vacancy + credit loss + concessions such as free rent. A center can be 100% physically leased and still run double-digit economic vacancy if leases were signed with months of free rent to fill it. Economic vacancy is the honest number, and it is the one that feeds effective gross income (EGI).
• Market (stabilized) vacancy: the vacancy an appraiser or lender assumes for the submarket and property type over the long run, regardless of today's occupancy. A fully leased building in a 7%-vacancy market is still appraised with a vacancy deduction — because leases expire, and the value being measured is the stabilized income, not this month's.

Where vacancy sits in the math

• The stack: gross potential rent (GPR) − vacancy − credit loss + other income = effective gross income. EGI − operating expenses = NOI. Vacancy is not a footnote to the income statement; it is the second line of it.
• Every point is real money: on a $440,000 GPR property, each 1% of vacancy is $4,400 a year. Capitalized at 6.5%, each point is $67,692 of value. Arguing about whether to underwrite 5% or 8% vacancy is arguing about roughly $200,000 of price — which is why this line, not the rent, is where experienced buyers and sellers actually negotiate.
• Vacancy is not absorption: absorption measures how fast a market leases space up; vacancy measures how much stands empty at a moment in time. A market can absorb space quickly and still carry high vacancy if new supply is delivering faster than tenants sign.
• The cushion test: compare the vacancy you underwrote with the vacancy the property can survive. The break-even occupancy lesson shows the occupancy at which income just covers expenses and debt — the distance between today's occupancy and that line is the real safety margin on the deal.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• The property: a made-up Gwinnett retail center, 20,000 square feet at a market rent of $22.00 per square foot. Gross potential rent is 20,000 × $22.00 = $440,000 — the rent if every foot were leased and every tenant paid in full, all year.
• Physical vacancy: one 2,000-square-foot suite is empty: 2,000 ÷ 20,000 = 10% physical vacancy, a rent loss of 2,000 × $22.00 = $44,000.
• Credit loss: underwritten at 1% of GPR = $4,400 for the tenant who will pay late, short, or not at all.
• Concessions: the newest lease was signed with 3 months free on a $44,000-a-year suite — $11,000 of rent that exists on paper and never arrives in year one.
• The honest total: vacancy loss $44,000 + credit loss $4,400 + concessions $11,000 = $59,400. Economic vacancy is $59,400 ÷ $440,000 = 13.5% — on a center a drive-by would call “almost full.” With $12,000 of other income added, effective gross income is $440,000 − $44,000 − $4,400 + $12,000 = $403,600.
• The seller's 0% trap: the seller's pro forma skips vacancy entirely and shows NOI of $440,000 + $12,000 − $140,000 in expenses = $312,000. The buyer's NOI on collected rent is $403,600 − $140,000 = $263,600. The gap is $48,400 a year. At a 6.5% cap rate, $48,400 ÷ 0.065 = $744,615 of asking price rests on rent nobody collects. That is the whole negotiation, hiding in one line most buyers skim.

Four vacancy traps

• The 0% pro forma: a seller showing gross potential rent as income with no vacancy line at all. On any multi-tenant property this is not optimism, it is arithmetic fiction — re-underwrite with at least the market vacancy before discussing price.
• “Fully leased” with free rent everywhere: occupancy was bought with concessions. Ask for the concession schedule and compute economic vacancy; a 100%-leased center at 13.5% economic vacancy collects like an 86.5%-leased one.
• Using today's occupancy as forever: a center that is full because one tenant holds 60% of the space on a lease expiring in 14 months is not a low-vacancy property; it is a concentrated bet. Underwrite the rollover year, not the snapshot — the DCF lesson shows how to price it year by year.
• Confusing a tight market with a safe property: Metro Atlanta retail vacancy has run historically tight in recent published market reports, and office vacancy historically high — the market number sets the starting assumption, but the property's own lease expirations, tenant credit and suite sizes decide the risk. Market vacancy is the floor for the assumption, never the ceiling on the diligence.

Cho nhà đầu tư người Việt

Tỷ lệ trống (vacancy rate) là phần tiền thuê trên giấy mà một bất động sản thương mại không thu được. Có ba tầng cần phân biệt: trống vật lý (diện tích đang bỏ trống), hao hụt tín dụng (có thuê nhưng không trả đủ), và trống kinh tế — tổng cả ba cộng thêm các ưu đãi như tháng thuê miễn phí. Ví dụ trên trang này (số liệu giả định): trung tâm bán lẻ 20.000 SF ở Gwinnett, giá thuê thị trường $22,00/SF, tổng tiền thuê tiềm năng $440.000. Một mặt bằng 2.000 SF bỏ trống là 10% trống vật lý, mất $44.000; hao hụt tín dụng 1% là $4.400; một hợp đồng cho 3 tháng miễn phí mất thêm $11.000. Tổng hao hụt $59.400, tức trống kinh tế 13,5% — dù nhìn từ ngoài trung tâm trông “gần như kín”. Người bán bỏ qua dòng trống sẽ thổi phồng NOI thêm $48.400, và ở cap rate 6,5% con số đó đội giá trị lên tới $744.615. Mỗi 1% trống trên bất động sản này là $4.400 mỗi năm, tương đương $67.692 giá trị. Lưu ý: thẩm định viên và ngân hàng luôn trừ một tỷ lệ trống theo thị trường kể cả khi tòa nhà đang kín chỗ, vì giá trị được đo là thu nhập ổn định dài hạn. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

Frequently asked questions

What is the vacancy rate in commercial real estate?

The vacancy rate is the share of a property or market that is not producing rent. Physical vacancy is vacant square feet divided by total square feet — in the worked example, 2,000 of 20,000 square feet is 10%. The figure that matters for income is economic vacancy: vacancy plus credit loss plus concessions, divided by gross potential rent — 13.5% in the same example.

What is the difference between physical and economic vacancy?

Physical vacancy counts empty space. Economic vacancy counts uncollected rent: empty space, tenants who do not pay in full, and concessions such as free rent. A property can be 100% physically leased and still have double-digit economic vacancy if leases were filled with free-rent packages.

What vacancy rate should I use when underwriting a Georgia commercial property?

Start with the submarket vacancy for that property type from a current published market report, then adjust for the property itself: lease expirations inside the hold, tenant concentration and credit, and suite sizes versus market demand. Appraisers and lenders underwrite a stabilized (market) vacancy even on a fully leased building, so a buyer's model that uses less than the market rate is arguing against the appraisal before it starts.

How does vacancy change what a property is worth?

Vacancy comes straight off NOI, and value is NOI divided by the cap rate — so each dollar of vacancy loss is multiplied by roughly 1 ÷ cap rate in the price. In the worked example, each 1% of vacancy is $4,400 a year, worth $67,692 at a 6.5% cap; the seller's 0% assumption overstates value by $744,615.

Tỷ lệ trống là gì, nhà đầu tư người Việt cần lưu ý gì?

Tỷ lệ trống là phần tiền thuê trên giấy không thu được, gồm trống vật lý (diện tích bỏ trống), hao hụt tín dụng (thuê nhưng không trả đủ) và ưu đãi như tháng miễn phí — cộng lại gọi là trống kinh tế. Ví dụ trên trang này (số liệu giả định): tiền thuê tiềm năng $440.000, trống vật lý 10% mất $44.000, hao hụt 1% mất $4.400, ưu đãi mất $11.000 — tổng $59.400, tức 13,5%. Người bán dùng 0% trống sẽ đội NOI lên $48.400 và đội giá trị lên $744.615 ở cap rate 6,5%. Thẩm định viên và ngân hàng luôn trừ tỷ lệ trống theo thị trường dù tòa nhà đang kín. Đây là thông tin giáo dục chung, không phải tư vấn tài chính hay pháp lý.

This page is general education, not investment, legal, tax, lending or financial advice. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com